WASHINGTON _ The first of what some predict will be manylawsuits against David Blech and his now-defunct brokerage firm,D. Blech & Co., was filed in U.S. district court in Manhattan onOct. 5.Gruntal & Co., a New York brokerage firm that at one time acted asD. Blech & Co.'s clearing agent, alleges in the suit that Blech"engaged in a massive scheme to manipulate the market for thesecurities of almost a dozen over-the-counter biotechnologycompanies." Other defendants named in the suit include BearStearns & Co., a Los Angeles-based money manager named StanleyBerk and two of Berk's "alter-ego" entities, Armor PensionManagers and Westside Partners, both based in Los Angeles.The suit cites alleged violations of the Securities and Exchange Actof 1934, the Racketeer Influenced and Corrupt Organizations Actand New York state law, among other regulations.According to Gruntal's complaint, Blech engineered a "parking"scheme wherein Berk _ via Armor and Westside _ "bought"securities from D. Blech & Co. based on an agreement by Blech torepurchase the securities within a few days and at a guaranteedprofit to Berk. Berk allegedly made the "sham" purchases throughGruntal on a "delivery versus payment" (DVP) basis. A DVParrangement meant that Gruntal paid for the securities and was notpaid back by Berk until the securities were tendered.The alleged scheme collapsed when D. Blech & Co.'s assets fellbelow Securities and Exchange Commission (SEC) net capitalrequirements on Sept. 22 of this year and was forced to shut itsdoors. On that day, Bear Stearns ceased serving as D. Blech & Co.'sclearing firm and refused to execute buy orders for Blech. As aresult, Berk allegedly "admitted" to Gruntal that he had placed hisorders for securities with the sole purpose of "selling" the samesecurities back to Blech. When Blech couldn't buy securitiesthrough Bear Stearns, Berk did not have the funds to pay Gruntal,according to the suit.Among the biotechnology stocks named in the Gruntal suit andallegedly "parked" by Blech with Berk were shares of AriadPharmaceuticals Inc., BioSepra Inc. and HemaSure Inc. D. Blech &Co. served as the sole underwriter of initial public offerings forthese three firms in 1994 and the Gruntal suit alleges that Blechsought to "artificially maintain the trading prices" of those stocksvia the parking scheme.The federal court document alleges that Berk's purchases werenever "bona fide" trades since Berk and his entities never intendedto acquire beneficial ownership of the securities ordered fromGruntal.The Gruntal suit further alleges that Blech's scheme was designedto disguise the declining financial condition of D. Blech & Co. byreducing its inventory, increasing its cash position, inflating thevalue of its remaining inventory and thereby improving its netcapital position. "The fraudulent sales of securities alleged . . .constitute a pattern of racketeering activity that was designed tocreate a constant flow of sham sales that were intended to, and did,inflate the value of biotechnology securities held by Blech," thelawsuit stated."Blech & Co.'s [sic] closing sent the price of a dozen biotechnologystocks for which Blech & Co. was the primary market makerplummeting and left not only Gruntal, but other brokerage housesas well, holding hundreds of thousands of shares of securitiesordered by Berk and his related entities for which Berk could notpay," the suit stated. On Sept. 22 alone, a portfolio of Blech-associated biotechnology companies lost about $168 million inmarket valuation.Although the Gruntal complaint did not name other brokerage firmsthat were unwittingly involved in the alleged parking scheme, it didclaim that Berk, Blech and their entities "victimized" numerousbroker-dealers and that many of those firms "are seeking, or willseek" damages for their losses. "Defendants have limited assetswhich are not sufficient to satisfy all claims against them," the suitstates.In the suit, Gruntal seeks to preserve the assets of each of thedefendants so that it may have a "meaningful remedy" once it hasobtained an award in an arbitration it has commenced against Blech,Berk et. al. with the National Association of Securities Dealers. Thecourt document requests an order of attachment against thedefendants' property to prevent them from "transferring ordissipating their assets."Gruntal is seeking $1,573,792 in damages from Berk and Blech.Attorneys from Gruntal & Co. did not return phone calls on Fridayand neither David Blech nor Stanley Berk could be contacted atpress time.According to a report in The Wall Street Journal, D. Blech & Co.and David Blech are the subject of an SEC investigation forpossible securities violations, including stock manipulation andillegal securities trading. SEC officials have declined to verify thatreport for BioWorld. n
-- Lisa Piercey Washington Editor
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